Brian Skiba of Deutsche Bank has put out another SCO report, "Four Reasons Why This Story Remains Compelling NOW" and he is predicting that SCO will "finalize" financial arrangements with Boies shortly and then they will open up a new campaign front and start suing corporate end users, maybe as soon as the end of the month. Boies isn't getting paid enough already? Or were the earlier stories floated in the press just hype? Now they are finalizing arrangements? I thought they told us and the SEC they did that already. Who knows where the truth lies with these people, no pun intended.

Should there be such "high profile" legal moves, Skiba writes, the stock could pick up nicely, because he says there has been "a relative dearth of news flow over the past several months". He's marking on a curve, evidently. Note also the disclaimer at the end:

"Deutsche Bank and/or its affiliates(s) makes a market in securities issued by the following companies(s): SCO Group, Inc. (The)."

Oh. No agenda there, then.

Wall Street may go wild on this report, I suppose, briefly, because hype and emotion is all, it seems with those hungry dudes, at least the so-called "small" investors. The distinct impression I am getting, being new to finance, is that the big fish in the loop depend on the little fish outside of it going into a feeding frenzy on cue, but what do I know? I'm no financial analyst.

Dion Cornett of Decatur Jones Equity Partners, the only other analyst following SCO closely, disputes the DB math, and shows in his October 27 report on SCO that, viewed rationally, no matter what SCO does, in his opinion, there is no way SCO can reach a $45 target from the licensing program, even at its most successful, and his math and his logic is compelling. He rates SCO "Underperform", which they define as meaning "returns at least 15% below the appropriate index". Part of his reasoning is that there are some workarounds that will make it hard for SCO to prove who is and who isn't using SCO code, even if you accept that any of it is theirs to claim, including a survival strategy of sticking with the 2.2 kernel for now and just upgrading applications on top. It's an interesting idea that technically could work for most SMBs. Some more financial facts on SCO on this Forbes page.

With that introduction, here are relevant snips from each analyst's report, including details on the survival strategy.

" . . . Reason 2: Near term catalysts exist. Over the very near term we believe the company will finalize the contract with its tenacious law firm Boies, Schiller and Flexner. This will set the backdrop for a stepped up litigious game plan against corporate Linux end users, which we believe could occur as soon as the end of this month. These lawsuits could encourage other corporate end-users to sign license arrangements with SCOX. . . .

"We believe there are several reasons for investors to consider a position in SCOX now, in advance of the scheduled earnings call on December 3rd. Most notable, at less than 8X our CY04 proforma EPS estimate of $2, the valuation is compelling. Further, with the $50 million cash infusion, the company has more resources to pursue its legal strategy. We also like this entry point as we believe the company is close to finalizing an agreement that provides mutual reward and benefit with its law firm -- Boies, Schiller and Flexner. Upon completion of this arrangement, we expect Boies and SCO will begin a legal campaign against corporate end users of Linux in order to jumpstart its IP licensing program. We believe that a number of high-profile legal moves could bring to the forefront the IP issue around UNIX and Linux which would likely result in some monetization on the part of SCO in the form of IP licenses. We believe these events, should they occur, will be a positive for the stock, which has otherwise been in a relative dearth of news flow over the past several months. Our target price is $45, with is 22.5X our CY2004 EPS estimate of $2. Investors should consider an investiment in SCOX as extremely high risk and volatile. . . .

"Disclosures

"Additional information is available upon request.

"Deutsche Bank and/or its affiliates(s) makes a market in securities issued by the following companies(s): SCO Group, Inc. (The)."

"SCO Group completes its 2003 fiscal year on October 31 and is expected to report results in mid-November . . . .

"Investment Considerations:
. . . .

"However a small number of things taken together indicate that the company's Linux licensing initiative is not going as well as SCO expected;

"Higher prices may not be justified, even if SCO wins its case against IBM; . . .

"As exhibit 1 on page 4 shows, even making the above series of optimistic assumptions with regards to SCO's growth, the resulting DCF (Discounted Cash Flow) price for SCO is only $8. Clearly investors are betting on a win in the IBM lawsuit and significant Linux-related licensing fees to bid SCO up to current levels.

"And since most Linux deployments today are generally built and maintained in-house using mix-and-match pieces, how is it even possible to audit whether a user picked pieces that belong to SCO? SCO has stated itself that it does not believe meaningful infringement exists in the Linux 2.2 kernel. What about companies still running that kernel or who upgraded with pieces not overlapping with SCO's disputed code?

"Furthermore, the amount due even for users that acknowledge using a yet-to-be-proven infringing product may be miniscule. Some have claimed after examination of the code bases that only 87 lines of code appear to have been cut and pasted. Hypothetically, if a court were to rule that only 87 lines of 2.5 million lines of code contained in a version of Red Hat's code infringe, then SCO may only be able to collect a proportional $0.02 of the $600 received for the complete code. In other words, Red Hat would owe SCO $1,600 for its entire installed based of Red Hat Enterprise Linux customers to date."

And I note no disclaimer at the end about Decatur Jones "makes a market in securities" issued by SCO, either. So, take your pick. Hype or reason? It's up to you. But Jones' point is well taken about using the 2.2 kernel and just upgrading applications on top. It's a survival strategy for corporate users, most of whom don't use any of the high-end code SCO is claiming rights on. I asked Robert Dohnert if the strategy would work, and here is his reply:

"With certain types of applications he is correct. Firewalls and mail and web server applications --they will still run efficiently on the 2.2 kernel. We still run our servers at work with SuSE 6.4 which still runs on a 2.2 kernel and we just backport most of the security patches and upgraded libs because my motto has always been if it isn't broke, don't fix it. meaning for our firewall and file servers 2.2 works well. For other things such as XFS which we rely on as our journaling filesystem and Oracle 9i they require certain core components that are only satisfied with the 2.4 kernel but those components can be back ported and incorporated in kernel 2.2 so in theory he is correct, someone would just have to prove it.

"But remember it has been established that those code submissions that SCO showed that were submitted by SGI, only have to do with 64 bit computing and are only tied into SGI's Altix offerings. Things like RCU and NUMA are not normally used by anyone unless you get into the extremely huge multiprocessor units. We just signed on with SGI because one of our clients just bought an Altix system to handle imaging and over dinner tonight myself and SGI's-second-in command of their Linux department had a conversation and he told me that they can prove that all of their kernel engineering practices are original work and that if SCO wants to escalate their war on SGI they have enough ammo to protect themselves, which explained to me why SCO withdrew their confrontation with SGI so quickly. For the average small business owner, SCO offers no threat as those types of businesses typically don't use the features SCO is complaining about. We have over 290 clients ourselves and maybe 15 percent of them use the advanced feature sets that SCO could have anything to lay claim to."

What this means is that the pool of companies SCO could stick up successfully is small, even if it had a prayer of success of collecting against anyone. I'm sure SCO won't tell you this when and if they make an announcement about suing end users, so I thought I'd give you a friendly heads up in advance and let you know about the suggested workaround.